Michigan Decides 2012: Public Act 4 emergency manager ballot proposal

Jonathan Oosting | MLive.comThe Benton Harbor City Hall is pretty quiet nowadays, after an emergency manager took over the finances.

Editor's note: Michigan Decides 2012 is a six-week series in which MLive will explore the half dozen proposals facing Michigan voters on the Nov. 6 ballot. We kick it off with Proposal 1, a referendum on Public Act 4.

Local representation is on hold in Benton Harbor, where a City Hall once populated by elected officials sits mostly empty. Where a phone full of unheard messages blinks behind a locked office door on the unlit second floor.

It's been nearly three years since the state sent Joe Harris to Benton Harbor and tasked him with resolving the city's financial emergency. And it's been 18 months since Harris, using new power afforded by Michigan’s so-called emergency manager law, stripped elected officials of all say in city government.

PROPOSAL 1 WORDING

• Establish criteria to assess the financial condition of local government units, including school districts.

• Authorize Governor to appoint an emergency manager (EM) upon state finding of a financial emergency, and allow the EM to act in place of local government officials.

• Require EM to develop financial and operating plans, which may include modification or termination of contracts, reorganization of government, and determination of expenditures, services, and use of assets until the emergency is resolved.

• Alternatively, authorize state-appointed review team to enter into a local government approved consent decree.

Should this law be approved?

YES ___ NO ____

"Public Act 4, from the beginning to the end, strikes at the heart of democracy," said
Commissioner Marcus Muhammad, who earlier this month met with Harris for the first time in more than a year. "Under my view, it is absolutely in conflict with the core principles the nation was founded on."

Critics say the law, updated and emboldened last year by Michigan's Republican-led legislature, raises big questions about representative government. But supporters say it is a working answer to a similarly large question: How should the state respond when local officials can’t fix fiscal emergencies in cities and school districts?

Harris has plenty of critics in Benton Harbor, and an independent audit of the city’s 2011 fiscal year revealed persistent problems. But retired resident Rob McLaughlin said he prefers an emergency manager to an ineffective city commission.

"The problem is that all people want to do is bitch and find the negative," he said. "But obviously the commission can't run the city. That's the bottom line."

Michigan voters will decide the fate of the emergency manager law in November, when Proposal 1 will appear on ballots across the state. A "yes" vote will re-establish PA 4, which was temporarily suspended ahead of the referendum. A "no" vote will strike PA 4 from the books and, according to an opinion from the attorney general, result in reimplementation of PA 72, the state’s previous law that provided emergency financial managers with fewer powers.

OUT WITH THE OLD, IN WITH THE NEW

Individuals appointed by the state currently oversee the cities of Benton Harbor, Flint, Pontiac, and Ecorse along with public school districts in Detroit, Muskegon Heights and Highland Park. Appointment has been recommended in Allen Park. Three cities -- Detroit, Inkster and River Rouge -- are operating under consent agreements that extend some emergency powers to local officials.

Financial struggles are nothing new for Michigan municipalities and school districts stretched thin by bloated pension costs, reduced revenue sharing, lost population and property taxes. The state has responded by adopting a series of increasingly tough laws, beginning with PA 101 of 1988, PA 72 of 1990 and now PA 4 of 2011.

"I don't think anybody doubts that some process needs to be available for the state to intervene," said Bettie Buss, a senior research associate for the Citizens Research Council of Michigan. "The question is just how strong that process should be. Public Act 4 was the result of a widespread opinion that Public Act 72 wasn't strong enough."

The new law built on the old in three key ways. First, it added early-detection mechanisms intended to help cities and school districts recognize and avoid potential emergencies.
Second, it extended an emergency manager’s role beyond finances. And third, it gave managers broader authority, including the ability to dissolve local bodies of government, make academic decisions in school districts and terminate or impose contracts on city workers.

"We've seen emergency managers in some communities for a very long time, and the governor felt that with just a couple additional tools, some of these situations could be addressed sooner and more holistically," said Sara Wurfel, a spokesperson for Gov. Rick Snyder. "An emergency manager could get in, deal with the situation faster, and turn it back to the local community."

Until it was temporarily suspended in August, PA 4 was on the books for nearly 17 months, providing emergency managers with multiple opportunities to exercise their new powers as they saw fit. But it's not clear whether those powers sped up the return to local control as intended.

James Hightower

In Benton Harbor, Harris already had negotiated new union contracts under PA 72. But he used the new law to strip power from elected officials -- several of whom had fought his every move -- and continued to sell city assets in an attempt to balance the books.

Harris did not respond to phone messages and emails requesting comment, but Mayor James Hightower and Commissioner Muhammad said the city remains in debt, owing vendors approximately $1.3 million.

To speed up the city's recovery, Harris and a select group of cooperative commissioners are preparing to request a $7 million loan from the state, which recently raised the cap on emergency lending to municipalities and school districts in receivership.

If the loan is approved, Hightower said the city could return to local control by the end of 2013. If not, the commission is looking at a five-year plan.

"We've cut back to the bone," said the mayor, who has worked as a bridge between Harris and commissioners. "We can solve it, but by and large it would take a number of years to get there. Securing an emergency loan would put us in a huge position to correct the problems."

PA 4 REFERENDUM BY THE NUMBERS

Estimated number of valid signatures collected for proposal: 203,238

Financial emergencies declared in 20 years under old law: 7

Cities and school districts with an emergency manager in 2012: 7

Cities and school districts with state consent agreements in 2012: 3

Total contributions through July 20 for committee supporting the law: $25,000.00

Total contributions through July 20 for committee opposing the law: $183,860.92

Residents in cities (not school districts) with emergency managers: 651,630

*Sources: Michigan Treasury and Secretary of State, 2010 U.S. Census

Pontiac, run by state appointees since 2009, is in a similar situation. Current Emergency Manager Louis Schimmel and his predecessor Michael Stampfler used their powers under PA4 to eliminate pay for elected officials, sell various assets, turn over management of the city's wastewater plant to the county, and outsource fire and police service to neighboring communities.

Despite those aggressive cuts and resulting savings, the city still faces a $5 million structural deficit. And so Schimmel placed on the November ballot a proposed millage increase for local property owners.

"If we got the millage, the city's structural imbalance would be corrected and we would be that much closer to getting rid of the emergency manager and being back under home rule," said Mayor Leon Jukowski, who Schimmel brought back to City Hall as a paid consultant. "If we do not get the millage, nobody can predict how long we're going to be under emergency management."

Emergency managers have broad powers to cut spending, but like elected officials before them, they face the challenging task of stabilizing revenues or finding new sources.

"Just balancing the budget is addressing a symptom, but the underlying problem is what's happened to the economic base of these cities," said Buss. "Neither Public Act 72 or Public Act 4 really does anything to address that deeper problem of economic base erosion."
THE BIG B WORD

If a structural deficit is a symptom of municipal sickness, the state believes that the worst-case prognosis is Chapter 9 Bankruptcy.

By empowering emergency managers to break contracts, Public Act 4 acts as "almost a quasi-bankruptcy process" designed to prevent the real thing, according to Eric Scorsone, a Michigan State University policy expert who helped write the law and train state appointees.

Courts have yet to rule whether that power -- typically reserved for federal bankruptcy judges -- violates the contract clause of the U.S. Constitution, and several pending legal challenges are expected to move forward should voters approve the law.

Bankruptcy offers struggling municipalities a chance to renegotiate or eliminate bonded debt, but a federal judge would decide the extent of that relief, and many observers believe the process would jeopardize credit ratings in surrounding communities and state government.

"This is referred to as moral contagion," said Terry Stanton, a spokesperson for Treasurer Andy Dillon's office. "In addition, units of local government in other states which have filed for bankruptcy have found the process to be very lengthy and costly."

This "contagion" is starting to be seen in California, according to Scorsone, where the city of Stockton filed for municipal bankruptcy in July. "But it's not huge. I think it's somewhat of an open question as to how much of an impact it would have."

Al Pscholka

Republican Rep. Al Pscholka, who sponsored the bill that became Public Act 4, believes many residents outside of effected communities don't understand that repeal could impact the entire state.

"Bankruptcy and bailout is really not where we want to go," said Pscholka, whose district includes Benton Harbor. "I mean, this is about fiscal responsibility. The worst thing that could happen is to have some of our larger cities that have been struggling go into municipal bankruptcy. It will affect everybody."

But critics contend that the law is designed to protect outside bondholders at the expense of residents in struggling cities.

"It's just patently obvious that the only winners under Public Act 4 are the municipal bond market and the finance industry," said Greg Bowens, spokesman for the union-backed coalition that helped collect signatures to place the referendum on the ballot. "It's not just the bonds themselves, but the repayment terms. They are simply unsustainable for many cities.

"The alternative is municipal finance reform. Providing a path to bankruptcy -- not that cities want to run there -- is a negotiation tool. It's leverage to try to get better rates on Wall Street and better repayment terms for those bonds that are out there."

If voters do decide to repeal Public Act 4, the state is expected to continue its fight against municipal bankruptcy by revisiting the old law or promoting replacement legislation.

"The question is how much they could enhance Public Act 72 without violating the will of the voters," said Buss. "Obviously there is a continuum of intrusiveness in terms of the state's participation in local government. The cap is a political cap. At what point do you set off the opposition again?"